Thursday, 25 April 2019

Why Most Educated People Fail to Understand Bitcoin

Misir Mahmudov, a widely-followed and respected bitcoin (BTC) analyst, has argued that “most educated people fail to appreciate bitcoin because they only specialize in one field.”
In order to truly understand how bitcoin works, Mahmudov, a financial economics student at Columbia University, recommends having some grasp of basic computer science and economics concepts.

Misir Mahmudov
Most educated people fail to appreciate Bitcoin because they only specialize in 1 field.

To truly understand Bitcoin you must have some grasp of:

- Econ
- CS
- Cryptography
- Game Theory
- Central Banking
- Governance
- Global Macro
- Risk
- Psych
- Networks
- Dist. Systems

23:04 - 4 Mar 2019
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He has also suggested learning more about cryptography, game theory, central banking, psychology, and distributed systems. Having some idea about these fields, Mahmudov notes, should help people in truly appreciating bitcoin and what it aims to offer. While pursuing their undergraduate studies, most people usually choose one or two main areas of focus such as economics, business studies, or a more technical discipline such as computer or mechanical engineering.

Those who are more interested in gaining a deeper understanding of how the human mind works, or how nation states are formed, might decide to major in social sciences such as psychology, sociology, and international politics. However, it is difficult, if not impossible, to become a master of all these subjects. But that may not be necessary in order to understand why Bitcoin is one of the most important inventions in modern history.

First proposed in a whitepaper published in November 2008 by its pseudonymous creator, Satoshi Nakamoto, the Bitcoin protocol specifies how an electronic peer-to-peer (P2P) cash system should work. For the first time, modern cryptographic techniques were applied to create what’s now a multi-billion dollar experiment in monetary theory.

Understanding The Importance Of Purchasing Power And Deflationary Assets
Unlike fiat currencies, which are inflationary as central banks can print an unlimited amount of paper money, there can never exist more than 21 million bitcoins. Being able to understand the implications of this when it comes to purchasing power requires some research into the various problems related to the fiat-based currency system.

In countries like Zimbabwe and Venezuela, the national currency has become practically worthless because it’s being created and controlled by a poorly managed centralized bank. Mismanagement of a nation’s money system by a single entity has led to hyperinflation in several areas of the world, which has made the cost of acquiring basic goods and services practically unattainable for the millions of citizens in these developing countries.

Acquiring The Background Necessary To Understand Arguments About Bitcoin

While prominent economists such as NYU professor Dr. Nouriel Roubini have argued that cryptocurrencies will not be successful in the long-term, there are other well-known economists such as Dr. Saifedean Ammous who firmly believe that Bitcoin’s decentralized value transfer system is a superior form of money. Although we may not agree with all the viewpoints expressed by Roubini or Ammous, our ability to interpret and analyze their arguments about decentralized cryptocurrencies would improve if we were more familiar with economic theories.

With Bitcoin being the first deflationary asset that has been adopted at a relatively large scale, the concept of scarcity and how it relates to an asset’s ability to become a long-term store-of-value (SoV), is perhaps best understood and articulated by former Google engineer, Vijay Boyapati.

According to Boyapati, who’s known for his convincing arguments about why the world’s most dominant cryptocurrency will become a great SoV, Bitcoin has “never been useful as a medium-of-exchange (MoE) because the opportunity cost of using it as such is huge. The only people who can stomach that cost are people for whom the transaction cost of not using Bitcoin is even bigger than the opportunity cost (i.e., illicit market trades).”

Understanding Bitcoin At The Psychological Level

Although Boyapati appears to have a professional and academic background only in mathematics and computer science (as detailed in his LinkedIn profile), he has been able understand how and why Bitcoin could evolve into a legitimate currency and a globally recognized asset. As he has explained using many different examples and scenarios, Bitcoin would have to work effectively as a unit of account, MoE, and a SoV in order to become a currency that is widely accepted by merchants worldwide.

In addition to involving concepts from economics and technical disciplines such as computer science, Bitcoin has to be understood at the psychological level. Before a currency or asset becomes widely accepted, people need to feel comfortable using it. The more confident people are about something, the more receptive they will be towards (at least) trying it, in order to determine whether it will suit them or work for them.

In places where the country’s citizens have lost trust in the national currency and financial system due to corruption, it will become increasingly difficult for the same centralized institutions to regain the same level of trust they once took for granted. Because decentralized currencies like Bitcoin are designed to minimize trust, as they don’t require intermediaries to settle transactions, it can be challenging at first to become comfortable with this idea.

Becoming Comfortable Conducting Transactions Without Intermediaries

Becoming familiar with how Bitcoin transactions are transparently recorded on block explorers can give people the confidence they need to start using blockchain-based currencies. Put simply, a blockchain is a type of data structure that allows multiple parties to engage in transactions without requiring a trusted intermediary. In most cases, a counterparty is also not needed when conducting cryptocurrency transactions.

Will Cryptocurrencies Form Part Of Web 3.0?

When the average person is first introduced to these crypto-related concepts, it can be challenging to fully understand how a monetary system like this could actually work. After carefully reviewing how a blockchain is designed to function, it becomes easier to start grasping how a decentralized digital currency such as Bitcoin can be reliably used to pay for goods and services.

In the coming years, cryptocurrency-related technology is expected to improve and a larger percentage of the world’s population will likely begin using the internet to learn and engage in business activities. Many believe that Bitcoin and other decentralized coins and tokens may just become a widely-accepted part of Web 3.0, which is a term used to refer to a new and evolving set of protocols that will be used to power the internet of the future.

Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only, and all the information belongs to the original publishers. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.

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